Daily Gains Letter

The Kind of Companies You Don’t Want in a Retirement Portfolio

By for Daily Gains Letter |

The Kind of Companies You Don’t Want in a Retirement PortfolioMy friend, a passive investor who, in his own words, doesn’t “like losses,” called me and asked if JC Penney Company, Inc. (NYSE/JCP) is a good place to be. “Should I buy,” he asked, “or just stay away from it?” To add a little background context, the investment portfolio he is managing is for his retirement; he wants stable and consistent returns over time.

Why J.C. Penney? The company has come under scrutiny for a while. The stock prices have plummeted due to the company posting poor performance, and its survival has become questionable. The company’s shares were traded as high as $42.00 in the beginning of 2012; now they hover close to $14.00. Look at the chart below, and you will see a clear downtrend in which the stock’s value declined 67%. My friend thinks there’s value in this company over the long period.

JC Penney Company Chart

Chart Courtesy of www.StockCharts.com

I think the better question that my friend should have asked is: “Should an investor who is saving for retirement add companies under severe stress to their portfolio?”

Some will definitely disagree with this, but companies that are under stress are not worth risking the retirement savings—J.C. Penney is just one example.

If I go a little back, I remember some saying that Bear Stearns—an investment bank and one of the early casualties of the financial crisis in the U.S. economy—was a great buying opportunity. Later on, the company’s share plummeted and it was forced to be taken over by a big bank. Investors who bought the stocks in their retirement portfolio then faced severe losses.

For all we know, J.C. Penney could be very similar.

Those who are saving for retirement, are eager to invest in a stressed company, and have a lot of time on their hands should go at it from a different angle.

When a company is in severe stress, there’s too much noise around it, and the volatility is very high, meaning trading ranges become bigger.

One investment strategy investors saving for retirement might want to try is to wait and let the dust clear first; let the noise settle down and see where the stock is heading. For example, J.C. Penney is in a clear downtrend—it continues to make lower lows and lower highs. It recently even broke below a major support level.

Once the question of its survival starts to taper off, and the stock’s price action shows an upward trajectory, this might just be one indicator for long-term investors to evaluate the company once again.

Going back a little further, in the midst of the financial crisis, General Electric Company (NYSE/GE) faced similar threats—survival was at stake. Those who bought in early faced losses because the stock kept going downward, but on the other hand, those who waited and then added the company’s stock to their retirement portfolio reaped the rewards.

Companies under stress pass just that on to investors who are saving for retirement: stress.

As I have repeatedly said in these pages, when you are saving for retirement, it should be taken seriously. Investors need to keep in mind that a retirement portfolio with consistence and a stable return is much better than one that may provide better returns, but has wild swings.

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